There are basically two options when you are asking, how does debt consolidation work. If you have debt and you want to consolidate it, your options are a debt consolidation loan and using a credit counseling service. The big difference in the two alternatives is one of them is a loan and the other is not.
How does debt consolidation work with a loan? A debt consolidation loan is usually secured with collateral and in most cases that is your home. While this is an alternative for getting out of debt, I do not consider it a good one. What happens is you will be paying off your debts with the equity in your home. You will ultimately be paying your debts in the form of a house payment. Your payments may be lower, because you are paying them off over a longer period of time. Your interest rate will be lower and the interest you pay will be tax deductible. The downside—if you default on the loan, the lender can foreclose on your home. Statistics show that most people that enter into debt consolidation loans have credit card debt again within a year.
How does debt consolidation work with a credit counseling service? The credit counseling service works with your credit card companies to have your interest rates lowered and your fees eliminated. You will make one payment each month to the debt counseling service and they will disburse it to your lenders. Your credit card accounts will be closed, but your collection calls will stop and your debt will decrease. You do not have to enroll all your credit card accounts. This is a credit score friendly version of debt relief. The program normally takes about 5 years to complete. This is a good option as long as you do not wait too long to become enrolled in a debt management plan.
These are the two most popular options for debt consolidation. Take some time to think about your financial situation and what will work best for you before making a credit card debt relief choice.
